T-Bills Yield To Repos

On January 16, the Reserve Bank of India revised the interest rate on fixed rate repos to 9 per cent from 7 per cent in the wake of the rupee crisis. Ever since then, the interest of competitive bidders in treasury bills (T-Bills) has virtually been killed.

Although banks would like to have higher returns on their investments in treasury bills, the RBI has held steadfast against market pressure to hike the implicit cut off yield on 14 day, 91 day and 364 day treasury bills from the current 7.32 per cent, 7.35 per cent and 8 per cent respectively.

 

Given that banks can now deploy their temporary surpluses by parking funds with RBI at 9 per cent, these T-Bill yields have obviously become unattractive.

Since the cut off yields

are a clear 300 - 400 basis points lower than secondary market yields, banks prefer to pick up treasury bills from the secondary market.

Banks waning interest in T-Bills could have serious repercussions for the government. More than Rs 4,800 crore worth of 364-day T-Bills are maturing and the government would rather have them reinvest this money.

The results at the last seven auctions of 91-day T-Bills are a pointer to the waning appetite for T-Bills. Of the Rs 700 crore raised on behalf of the government since January 23, Rs 521.65 crore has devolved on Reserve Bank. The stock of 91 day T-Bills with RBI has gone up from Rs 244 crore in April 1997 to Rs 541 crore by February 27.

Investment in these T-Bills by non-competitive bidders has been Rs 175.15 crore and investments by competitive bidders has been a paltry Rs 3.2 crore.

The result at the auction of 364 day T-Bills only highlights the lack of interest. At three auctions between January 14 and February 11, the RBI did not raise any resources. In fact, at the auction on January 28 RBI did not receive any bids.

At the auctions on January 14 and February 11 RBI decided

not to offer more than 8 per cent and rejected the bids that it received.

It was only at the last auction that RBI received a bid that was in line with its expectations. Of the six bids it received for Rs 169.43 crore RBI accepted a solitary bid for Rs 19.43 crore.

Since December RBI has raised only Rs 270.43 crore through 364 day treasury bills. This is in contrast to the over Rs 15,800 crore that was raised in the first eight months of the current financial year.

It is not true that competitive bidders have not sought a higher yield, which is indicated by the fact that the RBI has been rejecting the handful of bids that it has received.

Hence competitive bidders have preferred to park money with RBI through repos rather than invest in T-Bills. At the same time banks have not reinvested the proceeds from the maturing of existing stock of T-Bills.

Consequently the outstanding stock of 364 day T-Bills has declined from Rs 17,517 crore on January 14 to Rs 16,356 crore by February 27.

The primary dealers have been underwriting the issue of 14 day T-Bills selectively. For instance, RBI offers a commission of 12 paise per Rs 100 to primary dealers. While successful competitive bidders get a yield of 7.32 per cent, the primary dealers get a yield of 10.47 per cent.

The primary dealers in turn can offload the T-Bills in the secondary market to corporates that do not have any alternative avenue for deploying short-term surpluses.

"While the measures announced by Reserve Bank of India on January 16 were undoubtedly justified, the decision not to offer higher yields on 14 day, 91 day and 364 day T-Bills is baffling", says a primary dealer.

The rationale is that since the Bank Rate was increased by 200 basis points to 11 per cent and cash reserve ratio by 50 basis points to 10.5 per cent, RBI should have offered at least 9.25 per cent on 14 day, 9.50 - 9.75 per cent on 91 day and at least 10 per cent on 364 day T-Bills. This would ensure that competitive bidders do not go for the soft option of parking funds in repos.

It is in the interest of RBI to ensure that a conducive interest rate regime is created ahead of next years borrowing programme of the government. More importantly, the implicit cut off yields at the auctions cannot be out of sync with the secondary market yields.